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AN ACQUIRED TASTE

Zomato swallows Uber Eats India — just

desserts or a bitter pill?

Uber Eats India's fickle, deal-seeking customer base and
heavily loss-making operations weren't enough to deter
Zomato from an acquisition. Here's why
22/01/20
SUMANTH RAGHAVENDRA
When Uber Eats was launched in India in 2017, it was part of a global strategy for its parent
company, Uber
While most expected it to succeed, Uber Eats India has barely dented the market share of
incumbents Zomato and Swiggy
Instead, after close to three years of futile efforts to catch India's foodtech heavyweights,
Uber has sold the struggling food delivery business to Zomato
But given Uber Eats India's woes, questions linger about why Zomato even bothered to
acquire it. Especially after rival Swiggy passed on an acquisition
Summary
Expand

There was a time when startup investor wisdom decreed it difficult, if not impossible, for
Indian startups to compete with and win against global majors looking to expand into their
domain in India. The Uber of India would be Uber, and the Amazon of India would be
Amazon. On 21 January, when food tech major Zomato announced its acquisition of Uber
Eats’ Indian business, that thinking went out the window.

According to a stock exchange filing made by Zomato shareholder Info Edge, the deal was an
all-stock transaction, giving Uber a 9.99% stake in Zomato. Effective immediately, Uber will
discontinue its food delivery operations in the country and redirect restaurants, delivery
agents and app users to Zomato. Severance packages have been offered to the 250 employees
still at Uber Eats India, with the added option to apply for other openings within Uber India.

The deal represents a reversal in fortunes that few saw coming when Uber Eats launched in
the country, circa 2017. At the time, it was expected to leverage Uber’s popularity to displace
incumbents Zomato and Swiggy. Indeed, when Uber Eats launched in India, it was part of an
important strategic initiative for Uber worldwide. 
According to its IPO filings in March 2019, Uber Eats was catering more than 15 million
meals a quarter, partnering with over 220,000 restaurants in 500 cities worldwide. In a
subsequent financial update, Uber had said that Eats was hitting a revenue run rate of nearly
$400 million per quarter and growing at more than 100% year on year. “The company hopes
to keep expanding to be the first or second-place service in every market”, Uber CEO Dara
Khosrowshahi had said.
But at least in India, that never happened. 
Uber Eats never bettered its position as the #3 runner in India’s food delivery race. Instead,
Zomato and Swiggy forged ahead, their appetites seemingly insatiable. The signs that Uber
had given up the ghost in this battle have long been evident. Reports of Uber Eats India being
up for sale but unable to find a buyer have swirled around for well over a year. The question,
then, is what finally turned Zomato’s head? And, perhaps more importantly, what does this
mean for the foodtech duel Swiggy and Zomato find themselves locked in?

To answer those questions, we need to retrace Uber Eats’ journey to obsolescence in India. 
Apples and Oranges
For Uber, adding food delivery on top of its core ride-hailing service was a representation of
the “power of the Uber platform”. It wanted to leverage the large base of Uber drivers to offer
new services to the hundreds of millions of users who were already active users of the ride-
hailing app.
While this “super app” idea is fine on its own, the failure of Uber Eats in India shows that the
devil is in the details. Unlike other markets where food delivery orders could be serviced by
Uber’s existing fleet of cars, this could never work in India. 
For one thing, there were strict regulatory challenges around taxis being used for the carriage
of goods. Beyond that, the sheer traffic density in urban India all but ruled out the idea of
using cars for delivery. This meant Uber had to set up a completely new fleet of bike-based
delivery agents to operate in India, completely negating any hopes of synergy with its core
business. Its ride-hailing rival Ola also had a similar epiphany. It has since quietly scaled
down its investments in food delivery service FoodPanda, which it acquired in
December 2017.
Secondly, Uber used its reputational heft in the US to get a headstart in the food delivery
business. It struck up enterprise partnerships with large chains like McDonald’s and
Starbucks, both of whom had not offered delivery options previously. In India, there were no
comparable partnership opportunities since Zomato or Swiggy had already cornered
the market.
Finally, Uber’s best-performing markets in the West were outside the urban cores—suburban
areas and smaller towns with a lower density of dine-out restaurants. In France, for example,
Uber Eats said more than half its orders take place outside of Paris. In India, however, the
majority of orders were in large cities where, again, Zomato and Swiggy were strongly
entrenched—both in terms of restaurant tie-ups as well as delivery fleets. Both these players
had also expanded their coverage area to hundreds of cities and towns, leaving Uber Eats
bereft of any “quick-win” opportunities in relatively uncrowded niches.
Uber Eats had only one competitive dimension to play with—capital.
Fat in the fire
To induce restaurant partners to sign with them rather than just Zomato or Swiggy, Uber Eats
slashed its commissions. Its take-rates were often 10-20% lower than those of its competitors.
For customer acquisition, it offered deep discounts ranging from 20-50% per order.
At least from a traction perspective, the strategy seemed to be working. Uber Eats launched
in India in May 2017. Growth was slow but steady in the first year, growing to 9 million
orders per month by December 2018. These orders were serviced by 60,000 riders delivering
food from 26,000 restaurants across 40 cities.
This deep discount approach, however, caused a problem Uber Eats could never truly shake.
It attracted a fickle client base of extreme-value seekers with low order values. This meant
Uber Eats was unable to get to positive unit economics. According to a company source, who
declined to be named, Uber Eats lost a minimum of $1 for delivering an order throughout its
time in India. This translates to a straight loss of $9 million per month. And that’s just the
cost of the delivery service itself. Throw in marketing, salaries, other overheads, and the
monthly burn quickly jumps to over $15 million.
According to filings with the Ministry of Corporate Affairs, Uber Eats was on track to record
a loss of over $100 million per quarter in 2019, projecting operating losses to the tune of
$300 million for the five-month period ending December 2019. As per a valuation report
prepared by KPMG affiliate BSR, Uber had also projected that its food delivery business in
India would not turn a profit until 2026.
Despite being one of the world’s highest-valued startups, Uber struggled to digest
such losses.
Humble pie
For one thing, the company went public in 2019. This brought far greater public scrutiny of
its metrics and an increased focus on profitable growth. For the quarter ending September
2019, Uber’s total revenue rose nearly 30% to $3.81 billion. Its net loss, however, widened to
$1.16 billion. Brutal numbers for a company aiming for profitability by 2021.
One major culprit for the loss?
Uber Eats’ India business.
On an analyst call following these results, Nelson Chai, Uber’s chief financial officer, said as
much. “Without India, ANR (adjusted net revenue) would have been 11.1%. Now, it is
10.7%. So, India’s drag impact is 0.4%,” said Chai. Uber Eats India, on its own, was
lowering Uber’s global metrics by 40 basis points. The extent of the damage Uber Eats India
made on the global numbers is also demonstrated by the fact that while India contributed only
3% of global orders, it accounted for a quarter of the global EBITDA (earnings before
interest, taxes, depreciation and amortisation) losses for food delivery.
Equally importantly, despite this huge burn, Uber Eats barely dented the business of its
competitors. Swiggy and Zomato were both growing much faster and larger than Uber Eats,
which was stuck at the figure of 9 million monthly orders throughout 2019. Each company
was burning $40-50 million per month in 2019 to drive this growth. So, while their putative
victory over Uber Eats may justifiably be a point of pride for the Indian startup ecosystem,
there is a dark lining to this silver cloud. The victory was earned, in no small part, to the
“tyranny of capital”.
There ain’t no such thing as a free lunch
This same “tyranny of capital” also led to Zomato acquiring Uber Eats India.
It is an open secret that Uber has been trying to offload Uber Eats India for a while. Prior to
the Zomato deal, Uber Eats had prolonged acquisition discussions with Swiggy. Those,
however, never reached fruition. 
According to sources The Ken spoke to, Swiggy was not clear on what exactly it would be
“buying” if it acquired Uber Eats India. The incremental value was not convincing.
But where Swiggy might have been unconvinced, Zomato saw value.
To understand this, let’s trace the contours of the deal.
Zomato is paying nothing in cash. The acquisition was financed entirely in stock, giving Uber
a 9.99% stake in Zomato. Depending on whom you ask, the value of this stake ranges from
$200 million to $300 million. One source told The Ken that the stake was pegged to
Zomato’s recent funding round, where it was valued at $3 billion. Another source insisted
that the equity stake was based on Zomato’s previous funding round in 2018, where it was
valued at around $2 billion.
In return, here’s what Zomato got. All Uber Eats India’s restaurant partnerships and delivery
agents have been transferred to Zomato. It is not clear at this moment as to how many of
these partnerships and delivery agents were exclusive to Uber Eats in the first place.
According to sources, there were only a few hundred restaurants that worked exclusively with
Uber Eats, and these outlets aren’t even obligated to continue with Zomato.
All users of Uber Eats India who ordered food in the last six months have been transferred to
Zomato. These users have been gifted three discount coupons of Rs 150 each, as well as a
three-month subscription to Gold, Zomato’s subscription programme. These benefits have
been offered even to Uber Eats India users already on Zomato, so it is moot as to how many
incremental unique users Zomato is gaining. In any case, given how promiscuous and value-
seeking the archetypical Uber Eats user is, it is unlikely that Zomato will see a significant
increase in its user base.
In addition, all users who open the Uber Eats India app will automatically be redirected to
Zomato for a period of six months. Presumably, this includes the standalone Uber Eats app as
well as clicks on Uber’s ride-hailing app, which currently has a DAU (daily active user) base
of approximately 2 million in India. While this represents a top-of-the-funnel marketing
channel for Zomato, wouldn’t Uber Eats have leveraged this in the first place had its value
indeed been meaningful enough to make a competitive difference?
There’s also little guarantee that the poor unit-economics that plagued Uber Eats India will
not continue to hamper Zomato, too. Given this scenario, can Zomato afford to guzzle cash to
preserve this deeply unprofitable business with extreme value-seeking customers?
Following the dictum of “valuable companies are bought, not sold”, it is fairly clear that, at
least from a market perspective, Zomato is unlikely to benefit in any major way from
this acquisition.
Zomato, though, likely has strategic reasons beyond all this.

When life gives you lemons, make lemonade

The Gurugram-headquartered foodtech giant has been trying to raise a large funding round
for a while now, but with limited success. Zomato’s last major fundraise—$210 million from
China’s Ant Financial—was in October 2018. Given that the company burnt approximately
$40 million per month in 2018, that funding wouldn’t have lasted long. 
Zomato has since rationalised its spends and is said to be burning $20 million per month at
present, according to a recent filing by Info Edge. As recently as September 2019, the
company laid off hundreds of employees and is allegedly still downsizing. 
The company has also had a tough time with hotel partners unhappy with its controversial
Gold membership programme. Zomato has since tweaked Gold’s benefits, practically doing
away with the original deal—buy one get one on food, buy two get two on drinks—and
instead offering flat discounts in the 15-30% range on dining-out orders. To avail this
discount, though, Gold members are required to pay for the bill through the Zomato app. This
may be a clue as to the company’s future ambitions in this regard.
But even at a lower burn rate, Zomato has a short runway left. Earlier this month,
Zomato announced it had raised $150 million, once again from Ant Financial. This equates to
a little over half a year of runway at the current $20 million monthly burn rate. Investors such
as SoftBank and Temasek are said to have explored investing in Zomato but declined. Their
refusal stems in part due to concerns about the cash-guzzling nature of the business, but also
since Zomato is seen as being in the #2 position, well behind Swiggy, in the food
delivery sweepstakes.
The acquisition of Uber Eats gives Zomato a fresh narrative to take to potential investors.
With Uber Eats out of the picture, the food delivery market in India—estimated to touch $12
billion by 2023—is effectively a duopoly between Swiggy and Zomato. While consumers
might detest duopolies, investors love them as it represents a potent competitive moat.
Zomato CEO Deepinder Goyal quipped in the announcement, “With this development, we
are the undisputed market leaders in the food delivery category in India”. Now, this claim
might not necessarily be true. According to sources, for December 2019, even adding Uber
Eats India’s 9 million monthly orders to its own monthly figure of 32 million orders, Zomato
would trail Swiggy by about 2 million orders. Still, at least the acquisition narrows the gap
between the rivals, giving enough narrative ballast to Goyal and Zomato to claim parity, at
least temporarily.
Could the deal also tempt Uber itself to invest in Zomato now that it has entered the latter’s
cap table? Unless this was part of an explicit quid-pro-quo of the acquisition, it is unlikely.
For one, Uber deigned to take common shares in Zomato rather than preference shares. This
points to both its desperation to offload Uber Eats India, as well as an acceptance to go right
to the bottom of the liquidation preferences stack of Zomato’s cap table. Basically, Uber will
not make any money if/when Zomato exits until all its other investors have taken their cuts.

Since going public, Uber has also realised it is not getting much public market value for their
minority investments around the world. Instead, it has increasingly moved away from equity
holdings towards cash in cases where it has a choice.
But even if Uber, or its investors like SoftBank, don’t invest in Zomato, there should be little
surprise if Zomato now parlays this acquisition to finally complete its long-in-the-
making $600 million funding round. Once this round is complete, the food delivery market in
India will finally become a duopoly—unless Amazon enters the fray as it has threatened to do
—with two equal competitors jostling for complete domination. 
Two peas in a pod? Not quite
Until now, Swiggy had a clear lead in the food delivery market—both in terms of market
share as well as in terms of access to capital for expansion. This was a result of both strategy
as well as luck. Swiggy raised its initial rounds of capital from marquee institutional investors
(Accel, SAIF, Norwest, Bessemer), following this up with large capital infusions from the
likes of Naspers and Tencent, who do not operate on ten-year fund lifecycles. 
On the other hand, Zomato took a much longer path, first raising small amounts from the
likes of Info Edge, a publicly-listed company, followed by larger sums from Sequoia and Ant
Financial. Unlike Swiggy, which was completely focused on India, Zomato attempted to go
global, perhaps a bit prematurely, and had to take a long path back to refocus on key
geographies and market segments. But once Zomato has completed its $600 million funding
round, it will put the company on a near-even keel with Swiggy, both in terms of market
share as well as capital. 
What about Uber?
Retreating from cash-guzzling businesses like Uber Eats India gives Uber a better chance to
reach profitability on a global level by 2021, as it has projected to the public markets. It also
eliminates the uncomfortable possibility of competing with its former CEO Travis Kalanick,
who has set his entire focus on cloud kitchens since being shunted out from Uber.
More importantly, by offloading Uber Eats India, Uber has now freed up capital and
managerial bandwidth to focus on doubling down on its core ride-hailing business. In the last
few years, Ola has managed to take a clear lead over Uber in India, with Ola being nearly
twice as big as Uber  (in terms of rides and cities covered) as well as in strategic extensions
such as leasing, micro-mobility (via its partnership with scooter rental platform Vogo), inter-
city trips, electric vehicles, traffic data (via the Ridlr acquisition), neobanking (via Ola
Money and the Ola-SBI credit card) and self-drive options. Uber has not attempted any of
these in a meaningful manner yet.
Thus, through this one acquisition, we could see the emergence of not one but two duopoly
battles in India—Zomato and Swiggy in food and Uber and Ola in mobility.

Read more stories about Future Of Retail, Ride Sharing and Oyo in our narratives. Or see All

Narratives

 Acquisition
 
 Food
 
 Food Delivery
 
 Foodpanda
 
 Foodtech
 
 Ola
 
 Swiggy
 
 Uber
 
 Uber Eats
 
 Uber Eats India
 
 Uber India
 
 Zomato
 
 Zomato Gold

WRITTEN BY
 SUMANTH RAGHAVENDRA
Sumanth is a serial entrepreneur with more than eighteen years experience in running
startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup
attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns
appear regularly in leading publications. He holds MBA degrees from the Indian Institute of
Management, Bangalore and Thunderbird, The American Graduate School of International
Management, USA.

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LATEST FIRST


1.
Ayush Agrawal
Co-Founder | Seniority Ltd

“Earlier this month, Zomato announced it had raised $150 million, once again from
Ant Financial. This equates to around one year of runway at the current $20 million
 monthly burn rate. ”
Can someone please explain this to me? If Zomato is burning 20m/mo, 150m should
give it a runway of only 7-8 months, not one year. Am I missing something?
January 22, 2020 at 12:42 pm

2.
Adithya Bhat

Except for Uber potentially coming in as an investor, the acquisition doesn’t make
any sense at all. Wonder what the folks at Z have in mind.
January 22, 2020 at 12:13 pm

3.
Vidur Mahajan

So, Zomato acquired Uber Eats for the optics of it all, since it makes for a good story?
As opposed to letting Uber Eats shut down itself? Hmm
January 22, 2020 at 8:49 am

4.
ANANDH SUNDAR
DGM finance | Bic Cello India

a numbers backed story and good triangulation of numbers from the gloval
conference call. it would have been good to estimate the roi vs cumulative capital
deployed.
January 22, 2020 at 8:36 am

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